A Guide to Anti-Money Laundering for Crypto Firms
On a call in January to discuss JP Morgan’s quarterly results, an analyst suggested to the bank’s CEO Jamie Dimon that sky-high fintech valuations could mean incumbent providers are at risk of losing their grip on the market. While insisting that JP Morgan had started to evolve, Dimon recognized that it still had to get better and quicker, and he had a message for his management team: we should be afraid.
Dimon is right to be concerned. Consumers have become accustomed to the experience delivered by the latest generation of apps such as Amazon and Uber, and they expect the same from their bank. That has caused many to defect to fintech firms, a trend which accelerated during the pandemic as lockdowns drove more people online. In an interview with the New York Times at the end of March, Mark Goldberg, a partner at venture capitalist Index Ventures, predicted $1 trillion worth of value could switch from the incumbents to tech firms over the next 20 years.
Stripe and Square were two of the competitors highlighted by Dimon during the call, and it’s no coincidence that both qualify as hypergrowth firms. Hypergrowth is a term coined by Alexander Izosimov, previously CEO of telecoms provider VimpelCom. In an article published in the Harvard Business Review in 2008, Izosimov defined it as ‘the steep part of the S-curve that most young markets and industries experience at some point, where the winners get sorted from the losers.’ In more concrete terms, hypergrowth firms generate a compound annual growth rate of 40% or greater, compared with 20%-40% for those deemed to be growing rapidly. A growth rate of up to 20% is considered normal.
This potential is reflected in fintech valuations. Stripe raised $600 million in March, valuing the payments firm at $95 billion- nearly three times its previous valuation of $35 billion from 2019. Square, also a payment provider, went public in 2015 and has a market capitalisation of $124 billion (as of September 2021). Since opening at $11.20, its share price has risen to $271 (as of September 2021). For context, HSBC’s market cap is $116 billion (as of September 2021).
Hypergrowth creates hyperscale risks
Just before Robinhood’s IPO in July, which gave it a market cap of $40 billion (as of September 2021), US financial regulator FINRA fined the trading app $70 million for system outages, misleading communications and its trading practices as the stock market fell in March 2020. Robinhood’s troubles with regulators aren’t over yet- the firm is also expecting to be fined $30 million by the New York financial regulator NYDFS for what its prospectus referred to as ‘anti-money laundering and cyber-security related issues’.
Robinhood isn’t alone in struggling to align its compliance activities with its speed of growth. The UK’s Financial Conduct Authority (FCA) announced at the end of July that it’s investigating challenger bank Monzo for breaches of money laundering and financial crime regulations over a period of three years ending April 2021. In its latest annual report, alongside figures showing yearly growth of 124% in deposits and 50% in card spending, Monzo warned about the investigation’s potential impact on its financial position.
What fintechs like Robinhood and Monzo, not to mention their peers and rivals, need is a risk management solution that is always on- looking, learning, discovering, advancing. In part two of this blog series, we’ll explore how the next generation of data-enabled intelligent compliance technologies have been designed to meet the needs of hypergrowth fintechs.
Originally published September 6, 2021, updated May 6, 2022
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